Federal Reserve's Kashkari: Inflation remains too high and is spreading to every corner of the US economy

According to Zhihui Finance APP, Minneapolis Federal Reserve President Neel Kashkari stated that the inflation rate remains excessively high, and inflationary pressures have extended beyond oil price shocks triggered by the Middle East war. Kashkari said in an interview: "The inflation felt by the American public every day is not just about rising oil prices—it has now spread to all aspects of the economy."

Last week, the Federal Reserve unanimously voted to raise the federal funds rate target range by 25 basis points to 3.75%—4% to curb inflation. This marks the Fed’s first rate hike since July 2023. According to the policy statement, U.S. economic activity continues to expand at a solid pace, domestic spending remains resilient, productivity growth is strong, capital investment is robust, and employment growth is generally in line with labor force growth, with little change in the unemployment rate. At the same time, inflation remains elevated; this policy action is expected to help bring inflation back to the 2% target more promptly.

At the press conference, Waller stated that the Fed has “withdrawn some of its accommodative policy” this time, aiming to make financial and credit conditions more consistent with the ultimate policy goals. He emphasized that there are still too many categories of goods and services whose prices are rising at an annualized rate of more than 3%, and that this summer’s inflation data did not convince him that there has been meaningful improvement in the underlying trend of inflation.

A recent series of inflation data has reinforced the Fed’s rationale for tightening policy once again. Core inflation in August rose more than expected, sparking market concerns that price pressures may be broadening from tariffs and energy price shocks to other sectors. The Fed’s latest projections show that the median PCE inflation rate is expected to be 3.7% in 2026, while core PCE inflation is projected at 3.4%. More notably, officials now expect overall PCE inflation not to return to 2% until 2029, a further delay compared to previous forecasts.

Fed officials are increasingly concerned that inflation is not limited merely to areas affected by Middle East conflicts or tariffs. Kashkari noted that there is evidence of inflationary pressures in the service sector as well. He stated that bringing inflation back to the target level is the responsibility of the Fed and that the Fed has the tools to achieve this goal.

Kashkari was one of three officials who opposed holding rates steady in July, favoring a rate hike at the time. He had warned that waiting too long to raise rates could risk entrenching inflation and could force the Fed to take even more aggressive action.

Additionally, Kashkari pointed out that despite facing geopolitical conflicts and trade issues, the U.S. economy continues to demonstrate significant resilience, and the labor market remains strong. Kashkari added, "I hope that as some of these conflicts gradually recede into the background, economic growth can truly take the lead, and hopefully drive inflation down. If cooling inflation can take precedence, this would make the Fed’s job much easier."

Based on the signals released by the Fed itself, the current policy focus remains clearly centered on controlling inflation. The official statement emphasizes that inflation remains high, while economic activity is solid, capital investment is strong, and the job market has not shown significant deterioration. This means the Fed still has room to suppress price pressures through higher rates.

More importantly, and in contrast to earlier market expectations that Waller’s appointment would lead to interest rate cuts, the latest dot plot shows the Fed’s policy path is shifting towards "higher for longer": the median forecast for the federal funds rate at the end of 2026 has been raised to 4.1%, and most officials support at least one more rate hike this year. The latest dot plot shows that out of 18 officials submitting rate forecasts, 16 expect at least one additional rate hike in 2023. At the same time, the timeline for inflation to return to the 2% target has been pushed back to 2029.

This means that this week’s 25 basis point rate hike may not be a one-off policy adjustment. Upcoming data on inflation, employment, and energy prices will become key factors in determining whether the Fed continue tightening its policy later this year.